Question

Mittan Products, Inc., has a Antennae Division that manufactures and sells a number of products, including a standard antennae that could be used by another division in the company, the Aircraft Products Division, in one of its products. Data concerning that antennae appear below:

Capacity in units		68,000
Selling price to outside customers	$	68
Variable cost per unit	$	34
Fixed cost per unit (based on capacity)	$	22

The Aircraft Products Division is currently purchasing 4,000 of these antennaes per year from an overseas supplier at a cost of $66 per antennae.

Assume that the Valve Division is selling all of the valves it can produce to outside customers. From the standpoint of the Valve Division, what is the lost contribution margin if the valves are transferred internally rather than sold to outside customers?

Answer 1

• Lost contribution margin = Units sold lost due to internal transfer x contribution margin per unit sold to outside customer.

A	Selling price to outside customer	$                   68.00
B	variable cost per unit	$                   34.00
C = A - B	Contribution margin per unit sold to outside customer	$                   34.00
D	No. of outside units not sold if transferred internally	4000
E = C x D	Lost Contribution margin	$         136,000.00

• Answer = $ 136,000